How to Invest in Water: 5 Picks

How to Invest in Water: 5 Picks

Nearly three-quarters of Earth’s surface is covered by water, but with more than 96% of it in oceans and much of our fresh water trapped in polar ice caps, less than one percent is available for drinking. Yet human use of water will only increase with population growth, rising living standards, and widespread commercial use of water in everything from hydraulic fracturing to manufacturing.
Such escalating demand, combined with a fixed, limited supply, is why water is one of the most appealing long-term investments. On top of that, analysts and money managers see a big wave of water-related investing ahead, according to anecdotal evidence about increased enquiries and price-quoting activity from the consultants and engineers who initiate big water projects.
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Not all of this is tied to President Donald Trump’s promise to upgrade the nation’s crumbling infrastructure. Well-publicized water-pollution scandals like that in Flint, Mich., and widespread contamination of surface and groundwater in China “have elevated the importance of doing what is right over what is cheap,” says Matt Sheldon, senior portfolio manager at KBI Global Investors. Having put off water investment spending since the financial crisis, “politicians around the world are pushing a populist agenda around infrastructure spending, regardless of whether they lean to the right or to the left.”
How should investors approach the vast water space? There isn’t a single dominant company to focus on, and the range of water-related companies runs the gamut from utilities that distribute it and environmental services companies that treat and purify it, to makers of pumps and filters and technology companies that monitor and manage its use.


Today, there’s a growing number of exchange-traded funds offering diversified exposure to water-related stocks; two of the biggest examples are PowerShares Water Resources (ticker: PHO) and Guggenheim S&P Global Water (CGW). These ETFs typically hold a range of overseas listings, often in countries where scarcity makes water an even more compelling long-term investment. For example, China has 20% of the planet’s population, but less than 7% of renewable water resources. But the funds also have varying degrees of exposure to water utilities at a time when investors concerned with rising interest rates are keen to minimize such bond surrogates.
Bruce Jenkyn-Jones, co-manager of water strategy at London-based Impax Asset Management, favors subsectors like testing and monitoring companies and makers of specialty equipment like filters and pumps, citing their high barriers to entry, recurring revenues, and broad exposure to end users all over the world. “Stock prices have been driven by superior earnings growth and earnings resilience,” he says, rather than a big expansion of price/earnings ratios. This could still come, he says, as investors embrace the theme.
Today, for instance, the PowerShares Water ETF trades at 23.1 times trailing 12 month earnings—a tad richer than its median over the past decade, but well shy of the peak of 28.1 times. Compare this with, say, the Industrial Select Sector SPDR ETF (XLI), which is already straining at itsdecade-peak of 20.7 times trailing earnings.
THE FOLLOWING are three water-related stocks that we like:
Tetra Tech (TTEK), based in Pasadena, Calif., provides consulting, engineering, and program-management services to big water-infrastructure projects. It earns roughly 40% of its revenues from U.S. federal, state, and local governments, and 30% overseas. Its backlog has grown 34% year over year to a record $2.5 billion on orders from international development. Recent deals like its acquisition of Eco Logical Australia continue to expand its environmental and water services in the Asian-Pacific region.
Management forecasts revenues of about $2 billion in fiscal 2017, and per share earnings of $2 to $2.20. Canaccord Genuity analyst Bobby Burleson recently raised his price target on the stock from $45 to $50, 27% above the current $39.40.
According to the Environmental Protection Agency, more than a third of U.S. pipes are in critical condition and in dire need of repair and replacement. That ought to be good news for Xylem (XYL). Based in Rye Brook, N.Y., the engineering and technology company has a water-infrastructure division that makes pipes, pumps, and equipment for transporting, treating, and testing water, while a smaller “applied water” division makes equipment for residential, commercial, and agricultural use. It is geographically diversified, earning 42% of revenues in the U.S., 31% from Europe, and 14% from the Asian-Pacific region.


Forecasting a water-infrastructure upcycle three years ago, Oppenheimer analyst Jim Giannakouros urged investors to buy the stock. It has since gained 33%, to $48.75. He still thinks Xylem is a stock to own. While earnings could be pressured if the euro gains against the dollar, Xylem offers the promise of organic growth, margin improvement, competitive positioning, and recurring revenues. His price target is $56, about 17% above the stock’s current value. Xylem, he says, is a good stock to accumulate on pullbacks.
Global water use per capita was 350 liters a day in 1900. By 2000, it had nearly doubled to 640 liters. Itron (ITRI) makes smart meters that measure and manage the use of electricity, gas, and water, and it helps utilities manage water use with a smaller carbon footprint. Based near Spokane, Wash., the company occupies the sweet spot in the modernization of electric and water delivery. It reported 2016 per share earnings of $2.54, up from $0.73 a year ago, and free cash flow of $72.3 million, up from $29.4 million, on revenue of $2 billion, up from $1.88 billion.
Management expects 2017 growth to be back-end loaded, so any dips or disappointment until then could allow patient investors to accumulate shares, which now trade at 21.3 times adjusted earnings. Wall Street analysts have an average price target of $71, 14% above the current $62.20.

http://www.barrons.com/articles/how-to-invest-in-water-5-picks-1489814477

The Water strategy seeks to achieve sustainable, above market returns over the longer term by investing globally in companies active in the rapidly growing water value chain. Investments are made in stocks of companies that generate >20% of their underlying revenue through products and services that address a number of long term macro-economic themes: growing populations, rising living standards, increasing urbanisation, rising consumption, aging in developed countries' water infrastructure, more stringent water quality regulations, and depletion of clean water supplies.

http://www.impaxam.com/investment-strategies/listed-equity-investment-strategies/water-strategy

I trust Simon has been in contact with Impax.

Raider